How long would it take you to save up $200,000? 4 years? 7 years? 10 years? Heck, maybe 20 years? The average house price in the U.S. is $200,000 and that’s certainly no chump-change. Yet, when it comes to buying a house, many people spend just a few hours trying to figure out what house would be best for them. In the end, they just end up picking the one that looks the biggest from the outside and has the nicest kitchen (as if the average person really stays home and cooks anymore).
If you plan on buying a house within the next two years, you really need to start planning now.
Top 10 Things to Consider When Buying a House
So what are these top things that you need to consider when buying a house? Are there really 10 that are truly important?
In fact, there are probably more, but these are just the biggies. Ignore these, and you’ll likely be kicking yourself soon after the purchase…
What are the three most important things when buying a property?
Location, location, location – that’s the old realtor’s joke. It’s not a very good one, but it does nail down the point. Location is UBER important!!
- Is your home in a good area of town where property values have been consistently increasing?
- Are you close to many urban areas that are full of employment?
- Are there any low-income housing projects nearby or registered sex offenders?
- How many rental properties are in the area (the more there are, the less likely your house will increase in value)
If you’re considering buying a house, go walk the streets at different times of the day. If there are kids running around, people jogging the streets, and no crazy loud noises (music, trains, domestic disputes, etc.), then you’ve probably pegged a pretty good area.
2) The Size of the House
Is the size of your prospective house appropriate to your family’s needs? Or…is the house you’re looking at more of a mini-mansion with 6 bedrooms and 5 bathrooms….for your family of four…?
Just 30 years ago, the average new home was built with 1,700 square feet. Today, new construction homes average more than 2,600 square feet! And, the size of our families have gone down!
When you’re looking for your next house, be careful not to fall in love with a house just because it has a ton of space.
More space often means:
- A more expensive home, which will force you to…
- Work more hours…which means you’re…
- Spending even less time in the home that you supposedly love!
If you truly want to enjoy your home, be realistic about its size. One spare bedroom is totally fine. But if you suddenly have two or three…plus a workout room, a man-cave, and a pole barn…you might actually become less happy because of the space and all that stuff that’s taking over your life.
3) The Down-Payment Percentage
How much do you plan to put down on your next house? If it’s your first home purchase, I’d shoot for at least 10% down (that’s what I did), but 20% is better. (Oh, and on a 15-year mortgage too – you’ll be happy with this decision when you’re in your 40’s and no longer have a house payment :)).
If you’re getting ready to buy your second house – target a 50% down payment (after all, you should have a ton of equity coming from your first house at this point.
And, if you’re buying house #3 or greater, you should be focusing on the 100% down payment plan.
If this freaks you out and you think it’s impossible, consider the alternative:
- You put very little down on the house
- Much of your money now goes toward interest in the first five years
- When it’s time to move, you’ll have little-to-no equity in your home and you’ll be forced to put nothing down on the next house…
…sooooo when is it that you’ll actually own your house…??? Sounds like never. Do your best to save up a hefty down-payment and work to pay off your mortgage over time. If you’re having issues saving up enough for your next home purchase, then the house is likely just too big or in too elite of an area for you. It might be time to reset your wants and needs when it comes to buying a house.
4) Your Future Life Plans
If you currently live in Indiana, but you’ve always dreamed of moving out to California, should you still buy a house in Indiana?
Here’s my rule of thumb. If you’re not going to live somewhere for at least five years, don’t buy a house there.
- This could lead to becoming a default landlord – where decide to move, but can’t sell your first house, so you end up renting it out to the first slime-bag that comes along and promises to pay you money each month…you all know how this story ends…
- If not a landlord by default, you end up selling your house and losing money it after the realtor fees, closing costs, interest payments, etc. It would have been better for you just to rent something cheap and save up your cash for your real long-term home.
If you have absolutely found the location of your dreams and want to stay there for 5 years, 10 years, or more likely – your whole life, it’s time to buy! Home ownership is awesome when you’re in it for the long haul.
5) The Cost of Houses Nearby
Where I live, houses cost between $150,000 and $200,000. If I walk three blocks east, houses suddenly jump into the $400,000+ range. Then, walk another two blocks and you can buy up a nice home for $130,000… The people that live in those $400,000 houses are absolutely delusional – not because of the price of the home, but because of the low value of all the homes around it! In a hot market like this one where everyone seems to have money to throw around, it’s not that apparent. But, when the market cools down, how many people do you think will be willing to spend $400,000 to live in a $150,000 neighborhood?
Not many. (Which means what? That you’ll have a hard time finding a buyer, and you’ll have to accept less money than you’d like for your home when it’s time to sell it!)
Before you fall in love with your next house, be sure to look around at the houses nearby. If your home is the most expensive, be ready to live there for the absolute long-haul. Either that, or just plan on losing money when it’s time to move.
6) The Price of the House vs. Your Income
If you want to be wealthy later in life, then stop buying houses that the bank claims you can afford. All the bank is worried is getting paid. If they think you can eek by on your earnings and pay them your mortgage payment, that’s all they care about. Will you have money left over for saving or investing? Most likely not.
Stop using the bank’s rule of thumb to figure out how much house to by. It’ll just leave you broke like all the other schmoes with big houses out there.
Instead, use this simple rule of thumb:
- Buy a house that costs no more than twice your annual income, and
- Do it on a 15-year fixed mortgage
That’s it. You’ll pay it off quickly, you’ll pay very little interest, and you’ll suddenly have a cash flow that you never dreamed possible!
Related: How Much House Can I Afford?
7) Maintenance Costs
There are two major factors that lead to high maintenance costs:
- The size of the house
- How old the house is
The bigger the house and the older it is, the more it’s going to cost you to keep it looking and running as it should.
According to The Balance, the general rule of thumb on home maintenance costs is 1% of your home value each year. In other words, if your house is worth $300,000, it’ll cost on average $3,000 a year to upkeep. If you have a newer house, it might be 0.5%. If your house is 100 years old, you might want to figure on 2%.
When you’re thinking about buying a house, maintenance costs are definitely something you want to keep in mind.
8) Property Taxes and Insurance
You know when you go to the car lot and you find the car that’s absolutely perfect for you? You buy it immediately, drive it off the lot, and then in about 5 minutes you learn that the insurance costs per month are more than double that of your last car…!!! Ugh…
This happens with houses too….
People fall so love with their next house that they forget to properly estimate the costs of property taxes and insurance.
- Is that home in a flood zone?
- Is it located in a high-tax area?
- Is the house more than double the square footage you’re used to? (in this case, you’ll pay more in taxes and insurance!)
Do your due diligence. Get solid estimates on the property tax and insurance for your next dream home. Chances are, it might actually be a nightmare.
9) Cost of Living
Are you moving from one city to another? Perhaps you’re even moving out of state! Before you start buying a house, take note of the cost of living in your next area.
Sure, you might be earning 10% more by making the move, but home prices might be 50% more, and daycare costs 25% more! Sounds like you’re going backward to me. If you’re going to consider the costs of anything before your move, beware the cost of housing.
10) Resale Value
Even if you think this next house is your “forever house”…it’s not.
- neighborhoods change
- your lifestyle changes (with kids, grandkids, travel, your mobility, etc.)
- money situations change
- even your hobbies will change
Today, you might love riding horses and gardening. Tomorrow, you might have an itch to travel to places that you’ve never even dreamed existed. The fulfillment of each of these dreams would require a vastly different home life, wouldn’t you say? One would have sprawling hills and acreage; the other a small space that’s easily managed.
The point is, even on day 1, you’ve got to think about the resale value of your home…because you’re going to sell it someday.
- Is the neighborhood established and growing?
- Does the house have any quirks that would make it difficult to sell (ie. It’s tall and ugly, has a steep driveway, is on a horrendously small lot, is constantly flooded, etc.)
- Does it appeal to the masses, which would make the sale quite easy when it’s time?
If the home is an exact depiction of your life and your loves (ie. It might have 3D sculptures of trees and plant life along the walls, or maybe murals of Hello Kitty are everywhere), then it’s probably not suited for many other people.
Your house should work well for you and create joy in your life, but if your friends come over and are dumb-struck by the individuality of your home, that’s likely going to be a problem when it’s time to sell. Don’t get caught in this trap when you’re buying a home.
Lessons Learned For Buying a House
So what have you learned? Hopefully a ton! Mainly, you’ve got to think about more than where the home is and if it’s bigger than the house of your annoyingly successful co-worker (you know, the snooty no-it-all that seems to be in every office).
In addition to the location and size, you should be concerned with:
- the down-payment amount
- how this home will suit your life down the road
- what you can truly afford
- the value of your house compared to others in the area
- the cost of living, maintenance, property tax, and insurance
- how easy the home will sell when it no longer fits your needs
When will you be buying a house? And what is your top lesson learned from the list above??
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.